Top stock picks in European telecoms sector include Deutsche Telekom and Tele2 due to undervaluation.

From Morningstar: 2024-07-05 05:11:00

The telecommunications sector in Europe faces challenges with cost pressures and stretched dividends. However, pressure is expected to ease as inflation cools. Investors are advised to consider firms with prudent dividend policies, good capital allocation, and a cost-conscious mentality.

Key telecom stock picks include Deutsche Telekom (DTE) and Tele2 (TEL2 B). Telecom stocks are undervalued, with conglomerates like Vodafone and Deutsche Telekom trading at around 0.85 times price/fair value compared to streamlined firms like Tele2 and BT.A.

Industry issues include low pricing power, falling inflation expected to lower costs and increase margins, and some vulnerable dividends like Vodafone and Proximus. Price hikes are only effective in select markets due to strong competition, with UK firms being more successful in passing on inflation costs.

With inflation decreasing to 2.5% in June 2024, telecom firms can expect cost cuts to improve margins. Many telecom companies maintain fixed dividend policies, posing increased dividend risk. Selecting firms with sustainable dividends is crucial to avoid unmaintainable payouts.

Regarding top stock picks in the telecommunications sector, Deutsche Telekom offers exposure to rational markets like the US and Germany, with room for mid-single-digit dividend increases. Tele2 provides good management execution, moderate prices in Sweden, and a cost-conscious mentality for growing dividends.

Investors in Tele2 can expect revenue growth at low single digits and EBITDA growth at mid-single digits due to effective cost controls. Tele2 has been able to steal market share in Sweden from Telia and maintain growth in the Baltics. Focusing on home markets and reducing operations abroad has led to success for Tele2 in the industry.



Read more at Morningstar: Top Stock Picks in the European Telecoms Sector